Category Archives: China-U.S.

Mr Xi Goes To Pyongyang

IT HAS BEEN 14 years since a Chinese leader has visited North Korea. President Xi Jinping’s arrival in Pyongyang on his first visit since assuming power will provide a welcome boost to his North Korean counterpart, Kim Jong Un. It also comes ahead of the G20 summit in Osaka towards the end of this month, when Xi will meet US President Donald Trump.

While trade and technology will top their agenda, Xi will find it a useful bargaining chip to have the latest word from Pyongyang on the denuclearization of the Korean peninsula, a process in limbo since the collapse of the Hanoi summit between Kim and Trump in February.

Xi will also want to reassure himself that sanctions-hit North Korea remains potentially stable despite the tensions over denuclearization and economic deprivation. Some assistance on the latter by way of humanitarian aid and tourism (an area not yet subject to sanctions) will likely be forthcoming.

There is also much signalling going on here: from Pyongyang to Washington that North Korea still has China’s support, and from Beijing to Washington that denuclearization is not a bilateral issue and that China remains a critical player.

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China-US Trade: Storm Before The Calm Before The Storm

US PRESIDENT DONALD TRUMPis far from alone among his compatriots in taking a harder line against China. There is now agreement across the political spectrum in the US about the course the president has set, which Beijing would underestimate at its peril.

Let this Bystander recap where we are:

  • trade talks have stalled;
  • tariffs on Chinese imports to the United States have been imposed with more threatened;
  • US measures are being taken against the leading telecoms equipment maker Huawei that will have significant business consequences for the company in its Western markets;
  • powers have been activated that if deployed would cut off Huawei and other Chinese multinationals’ access to US components and technology on which they rely, such as, in Huawei’s case, Google’s Android operating system and Qualcomm, Intel and Micron Technology’s chipsets; and
  • sanctions against Beijing for its actions against Uighurs in Xinjiang, while still being held in reserve by the US administration, are now being talked about openly, as is criticism of the proposed extradition law for Hong Kong.

Until about a week ago, it seemed as if Beijing had navigated its way through the trade talks to a place that was acceptable if uneasily so and was, following its customary negotiating practices, backtracking at the eleventh-hour to ease its main pain points.

These included how the scale of its concessions, the conditions under which they have been made and how equally any agreement would be perceived to be in China, points on which the Trump administration, which regards all negotiations as zero-sum games, had no interest in accommodating.

The Clinton administration’s similar experience with talks over China’s accession to the WTO two decades ago would have provided some precedent to draw on, but the US administration’s default position is that any and all trade deals made by a Democratic predecessor are the worst deal in history, and allowing China into the WTO particularly egregious.

The consequence is that President Xi Jinping is increasingly being pushed into a corner. The tone of state media has in recent days been more defiant and nationalist. Officials have been quoted along the lines of, we would prefer to resolve the issues through dialogue but if the United States wants a trade war, then bring it on.

For now, there will be more tit-for-tat retaliation on tariffs while China will take informal administrative measures against US companies operating in China proportionate to the measures imposed on Chinese companies by the United States. If there is to be trade war, Beijing will wage a guerrilla campaign while Washington will fire its financial big guns. That will include quiet operations by Beijing in the three other theatres where the Trump administration is fighting its ‘strategic rivals’, Iran, North Korea and Russia.

The next breakpoint is the G20 meeting in Osaka next month where Trump and Xi will be in attendance, offering the possibility of a similar session to the one held during the last G20 summit in Buenos Aires over dinner on December 1 that kicked off the current round of discussions.

Trump believes that the United States has a stronger economy, and thus, he holds the upper hand. Being tough on China plays well electorally for him. No Democrat is going to campaign on being soft on China. For that reason, too, he will be in no hurry to strike any deal that does not look triumphant from a US perspective, providing the US economy holds up, and US consumers do not notice that they are paying up to an estimated $2,000 a year for Chinese products because of the US tariffs.

Xi’s position domestically remains strong, but the troubles with Trump provides scope to embolden internal critics The National Development and Reform Commission, sidelined by Xi’s centralisation of control generally and over economic policy in particular, and seen by Xi when he took power as controlled by other factions, is, tellingly, starting to show signs of recovering its standing.

The republication of old Xi speeches by Party theoretical journals is also a straw in the wind that Xi is in a position where the rectitude of his line on economic development needs reinforcing.

Xi has a delicate balancing act to pull off, none the less, rebalancing and deleveraging the economy while not letting trade frictions slow growth rapidly enough to put the main policy targets at risk. Meanwhile, for Chinese companies like Huawei, the race is on to develop indigenous technologies before their stockpiles of critical US components run out and expand sales to non-Western markets.

In that last regard, at least, the tide of economic history is on their side, albeit in the long run. Getting through the short term will be the rough bit on the trade side. But even if Trump gets his trade deal in timely fashion for the 2020 US elections, the struggle for technological supremacy between the world’s two great powers will continue long after.

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Huawei’s 5G Coins It In Despite Washington’s Objections

HUAWEI’S FIRST-QUARTER results suggest that the United States’s campaign against the world’s biggest telecoms equipment maker is having limited effect, especially outside the advanced economies.

The company has long denied Washington’s allegation that Beijing ultimately controls it and that its equipment could be used for espionage in the service of Chinese state security, the basis of the Trump administration’s campaign to prevent other governments from using Huawei’s 5G equipment.

Huawei says its income was 179.7 billion yuan ($26.8 billion) in January to March, a 39% increase on the same period a year earlier. It did not disclose its net profit but said it operated at an 8% net profit margin, slightly higher than in the first quarter of 2018.

It reported sales increases in all its three customer groups — carriers, enterprise and consumer customers. On the contentious 5G technology, it said it had signed 40 contracts with leading global carriers, and shipped more than 70,000 5G base stations, a number it expects to reach 100,000 by May. It says 2019 will be ‘a year of large-scale deployment of 5G around the world’.

In practice, only a handful of countries have heeded Washington’s exhortation to follow it in banning Huawei from their 5G telecoms network: Australia, New Zealand and Japan, all close US allies in Asia.

Europe, which will likely lead 5G rollouts — eleven EU countries have 5G auctions scheduled for this year and six for 2020, with 30% of its internet users expected to be on 5G by 2025 — has been more ambiguous in its response.

Denmark, Germany, Italy, Norway, Poland and the United Kingdom all have expressed concerns about the cybersecurity risks of contracting a firm with opaque links to Beijing. However, Belgium has declined to ban Huawei, saying it has found no deliberate technological compromises in its equipment that could be misused by China’s state, but it will keep the equipment under review. Germany has taken a similar line but is drafting quality and cybersafety standards for 5G suppliers and talking about a ‘no-spying agreement with China.

France is debating 5G legislation that would impose extensive security tests. The report of a Dutch government investigation into Huawei is due in May when the United Kingdom is also expected to make a final decision. London has repeatedly raised concerns about Huawei equipment and the firm’s ability to fix cybersecurity problems but also has one eye on a post-Brexit trade deal with China.

For all of Europe, keeping China, a critical trade and investment ally, on side while securing the Internet of Things devices and automated vehicles that 5G will enable, from malicious state and non-state cyber attacks will be a delicate balancing act, made harder still by the current unease of the transAtlantic relationship. Washington may ban US firms from working with any others, including European firms, who use Huawei technologies and equipment.

Brussels and EU member governments will try to keep the decision-making process on the technical level and not get sucked into the political dimensions that saw Meng Wanzhou, Huawei’s chief financial officer and daughter of its founder, Ren Zhengfei, arrested in Canada in December at Washington’s request on charges of bank and wire fraud in violation of US sanctions against Iran. (She denies wrongdoing.)

The European Commission’s recently published recommendations on 5G network cybersecurity rejected bans on specific suppliers (unnamed, but for which read Huawei) and told member states to come up with joint EU-wide security checks for firms building 5G networks in Europe by the end of this year.

While Europe will be an important beachhead for Huawei’s 5G equipment and offers a near-term market, the company is looking beyond Europe. Many parts of Asia, Africa, Latin America and the Middle East will transition from 2G/3G/4G to 5G over the next ten years. That is where Huawei’s future sales lie.

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US-China Trade Talk Progress Seems Real If Ill-Defined

VICE-PREMIER LIU HE will be back in Washington next week for a further round of trade talks with the United States.

This follows a lightning round in Beijing on Thursday and Friday with US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer. Afterwards, both sides talked up the progress made particularly, it is widely reported, over ‘forced technology transfer’, the requirement for foreign investors to yield intellectual property in return for market access.

There is still no official word on the chapter and verse of this progress, and the use of words such as ‘constructive ‘and ‘candid’ to describe the talks suggest significant sticking points remain, particularly over enforcement mechanisms, as we have noted before in regard to China’s proposed new foreign investment law. So this Bystander will reserve judgment for now.

Regardless, it does seem that Beijing is engaging with the issue to a degree that it has not before. Its old argument that there was nothing to talk about as forced technology transfer did not happen, has been abandoned for the threadbare nonsense that it always was.

The outstanding questions now are to what extent will Washington gloss over some of the unresolved matters and how far it will be prepared to go in making concessions that will let China’s top leadership not lose face domestically.

There will also need to be a close reading of the Chinese- and English-language versions of whatever final text of a deal is agreed for each of the six areas of discussion: forced technology transfer and cyber theft; intellectual property rights; services; currency; agriculture and non-tariff barriers to trade. Many a slip…

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China’s New Foreign Investment Law Ready-Made For A Trade Deal

THE NEW INWARD foreign direct investment law, rushed forward and freshly rubber-stamped by the National People’s Congress, ticks all the boxes that Washington would want to see ticked.

But then it has been framed to do just that.

It overtly levels the playing field between foreign and Chinese companies in that it forbids forced technology transfer as a condition of foreign investment approval and makes it a criminal offence for officials to share foreign investors’ commercially sensitive information with Chinese firms (furnishing that information remains mandatory for local subsidiaries of international firms, however). Intellectual property protection is high on the list of US negotiators’ demands in the current round of US-China trade talks.

It also holds out an olive branch on another of their demands, greater market access, by adopting a ‘negative list’ system. Any sector not explicitly restricted will be open to foreign investors. However, there will still be 48 sectors that will remain off-limits, such as gene research, religious education and news media, or only conditionally accessible, such as oil and gas exploitation, nuclear power and airlines.

Regardless, both aspects can be packaged up to mutual advantage, a ‘win’ for the US side and a ‘concession’ by the Chinese one, though in truth they are neither.

When the new law comes into force on January 1, 2020, as with all Chinese legislation, it will provide a framework that will be open to interpretation and subject to enabling rules and regulations and the rigidity and frequency with which it is implemented.

Enforcement and redress via the courts is another matter. The judiciary is subordinate to the Party. Courts, particularly the new specialist business courts have due process, but also know their place. Every foreign firm investing and operating in China needs to appreciate that, and the difference between rule of law and rule by law. China has the latter.

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Options Narrow For A China-US Trade Deal

SUMMITS ARE FOR signings. US President Donald Trump’s second summit meeting with North Korean Leader Kim Jong-un in Hanoi should never have taken place. Or at least not until after officials had worked out what the agreement between the two countries was going to be. President Xi Jinping is not prepared to put himself at risk of the sort of fall-out that followed Trump walking out on Kim and that summit ending prematurely with no agreement.

The presidents meeting at Trump’s Florida resort Mar-a-Lago pencilled in for the end of this month to sign-off on a China-US trade agreement remains no firmer that, with Terry Branstad, the US ambassador in Beijing confirming to the Wall Street Journal that a date had not been finalised. The boosterish talk a couple of weeks back that a deal was near enough to completion to suspend the introduction on March 1st of 25% US tariffs on $200-billion-worth of Chinese exports is heard no more.

The sticking points of the agreement are proving as intractable as this Bystander has suspected all along that they would be, particularly over state subsidies, market access and forced technology transfers. No country readily changes its economic development model without either good cause or great pressure.

However, even the mechanism for monitoring and enforcing an agreed timetable for China to remove tariffs is proving difficult to nail down, as is getting the US side to agree to a schedule to withdraw its tariffs. The enforcement mechanism must be “two way, fair and equal,” Vice Commerce Minister Wang Shouwen said this weekend.

The US president is pushing for an early conclusion to a deal for political reasons. He needs demonstrable benefits from it to take into his 2020 re-election campaign. Xi also needs a deal that avoids him looking as if he has come off second best to the United States or has done anything to exacerbate the current slowdown in the economy.

For both, a narrow trade deal with enforcement mechanisms around only tariff-removal regimes seems more and more likely. Beyond that, Beijing will agree to buy more US produce and industrial goods and codify economic reforms that it is already planning to introduce. The more significant structural issues will be kicked down the road.

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US-China Trade Dispute Moves From Technical To Political Phase

US PRESIDENT DONALD TRUMP has extended the March 1 deadline for raising tariffs on $200 billion of Chinese imports pending a summit meeting with President Xi Jinping in Florida probably in the second half of next month.

Trump tweeted that ‘substantial’ progress had been made in the high-level trade talks between the two countries.

State media have used the same description of the progress.

The negotiating teams have been working on the text of an agreement that will cover currency, cyber theft and forced technology transfers, services, agriculture, intellectual property and non-tariff barriers. These texts will provide the framework for what state media call ‘the next phase’ of discussions.

There is no official readout from either side of what that progress is but it is thought to have been greatest over the yuan-dollar rate, technology transfer, intellectual property protection and non-tariff barriers — all areas in which Beijing has already been moving in support of its long-term economic reforms to rebalance the economy. China will also be making some immediate large purchases of US goods and produce to cut its headline trade deficit with the United States.

The sticking points are likely to remain subsidies and other supports to state-owned companies, which go to the heart of China’s economic development model.

Until the finalised texts can be seen, it will be impossible to judge what ‘substantial progress’ means, what the pace and scope of it will be, what remains unsettled and what mechanisms will be put in place to monitor and enforce whatever is agreed.

The US team will make one more visit to China for further discussions on that. The fact that Xi is going to meet Trump in Florida in late March rather than on Hainan Island immediately after the Trump-Kim Jong-un summit is a sign of how much of a gap there is between the two sides still, and how little Beijing has conceded on that score.

There is also the little-mentioned question of what concessions will be expected of the United States.

For now, however, it will be all about appearances and how the two presidents control the ‘optics’ of an agreement, which both men need to appear to domestic constituencies as a ‘win-lose’ deal more than a ‘win-win’ one.

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